Nokia 2005 Annual Report Download - page 71

Networks
The following table sets forth selective line items and the percentage of net sales that they
represent for the Networks business group for the fiscal years 2004 and 2003.
Year ended Year ended
December 31, December 31, Percentage
2004 Percentage of 2003 Percentage of Increase/
As revised Net Sales As revised Net Sales (decrease)
(EUR millions, except percentage data)
Net sales .................. 6 431 100.0% 5 635 100.0% 14%
Cost of Sales ................ (3 688) (57.3)% (3 591) (63.7)% 3%
Gross profit ................ 2 743 42.7% 2 044 36.3% 34%
Research and development
expenses ................. (1 194) (18.6)% (1 550) (27.5)% (23)%
Selling, general and
administrative expenses .... (665) (10.4)% (727) (12.9)% (9)%
Customer finance impairment,
net of reversal ............ — 226 4.0% (100)%
Impairment of goodwill ...... — (151) (2.7)% (100)%
Amortization of goodwill ..... — (58) (1.0)% (100)%
Operating profit (loss) ........ 884 13.7% (216) (3.8)%
Networks business group 2004 net sales increased 14% to EUR 6 431 million compared with
EUR 5 635 million in 2003 due to increased sales in nearly all markets as operators increased their
investments in network infrastructure. At constant currency, Networks business group net sales
would have been up 21%.
In Networks gross profit increased by 34% to EUR 2 743 million in 2004 primarily due to higher
sales, a product mix favoring high-margin products and overall profitability of 3G contracts,
compared with EUR 2 044 million in 2003. This represented a gross margin of 42.7% in 2004
compared with a gross margin of 36.3% in 2003.
In Networks R&D expenses decreased 23% to EUR 1 194 million compared with EUR 1 550 million
in 2003. In 2004 the R&D expenses represented 18.6% of Networks net sales compared with 27.5%
in 2003. R&D expenses in 2004 included impairments of capitalized R&D of EUR 115 million due to
the discontinuation of certain products and base station horizontalization projects and an
impairment related to the 3G/WCDMA radio access network project. During 2003, Networks took
action to improve profitability, by ceasing some ongoing research and development projects,
resulting in a reduction of the number of R&D employees. Networks did this to bring sharper focus
and lower cost to research and development, and to position Networks for long-term profitability.
If the impairments and write-offs of capitalized R&D costs and the restructuring costs were
excluded from both 2004 (impairments of EUR 115 million) and 2003 (personnel-related
restructuring costs, impairments and write-offs totaling EUR 470 million), the R&D expenses would
have remained at the same level and would have represented 16.8% of net sales in 2004,
compared with 19.2% of net sales in 2003.
In 2004, Networks SG&A expenses decreased by 9% to EUR 665 million compared with EUR 727
million in 2003. In 2004, SG&A expenses represented 10.4% of Networks’ net sales compared with
12.9% of net sales in 2003. In 2003, Networks SG&A included restructuring costs of EUR 80 million.
Excluding these restructuring costs the expenses would have remained unchanged from 2003.
Networks 2004 operating profit increased to EUR 884 million from an operating loss of EUR 216
million in 2003, and its operating margin improved to 13.7%, up from -3.8% in 2003. This was
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